for artificial persons, the law of the place
of incorporation,
the lex
incorporationis for companies
while other forms of business entity derive their capacity either
from the law of the place in which they were formed or the laws of
the states in which they establish a presence for trading purposes
depending on the nature of the entity and the transactions entered
into.

When the law limits or bars a person from
engaging in specified activities, any agreements or contracts to do so are either
voidable or void for incapacity. Sometimes such legal incapacity is
referred to as incompetence. For comparison, see Competence
(law).

Discussion

As
an aspect of the social
contract between a state and its citizens, the state adopts a
role of protector to the weaker and more vulnerable members of
society. In public
policy terms, this is the policy of parens
patriae. Similarly, the state has a direct social and economic
interest in promoting trade so, it will define the forms of
business enterprise that may operate within its territory and lay
down rules that will allow both the businesses and those that wish
to contract with them a fair opportunity to gain value. This system
worked well until social and commercial mobility increased. Now
persons routinely trade and travel across state boundaries (both
physically and electronically), so the need is to provide stability
across state lines given that laws differ from one state to the
next. Thus, once defined by the personal law, persons take their
capacity with them like a passport whether or however they may
travel. In this way, a person will not gain or lose capacity
depending on the accident of the local laws, e.g. if A does not
have capacity to marry her cousin under her personal law (a rule of
consanguinity),
she cannot evade that
law by travelling to a state that does permit such a marriage (see
nullity).

Natural persons

see also Testamentary
capacity Standardized classes of person have had their freedom
restricted. These limitations are justified exceptions to the
general policy of freedom
of contract and the detailed human and
civil
rights that a person of ordinary capacity might enjoy. Hence,
for example, freedom of movement may be modified, the right to
vote may be withdrawn, etc. As societies have developed more
equal treatment based on gender, race and ethnicity, many of the
older incapacities have been removed. For example, English law
used to treat married women as lacking the capacity to own property
or act independently of their husbands (the last of these rules was
repealed by the Domicile and Matrimonial Proceedings Act 1973 which
removed the wife’s domicile of dependency for those marrying after
1974, so that a husband and wife could have different
domiciles).

The definition of an infant or minor varies,
each state reflecting local culture and prejudices in defining the
age
of majority, marriageable
age, voting age,
etc. In many jurisdictions, legal contracts, in which (at least)
one of the contracting parties is a minor, are voidable by the
minor. For a minor to undergo medical
procedure, consent
is determined by the minor's parent(s) or legal
guardian(s). The right to vote in the United
States is currently set at 18 years, while the right to buy and
consume alcohol is often
set at 21 years by U.S. state law. Some
laws, such as marriage laws, may differentiate between the sexes
and allow women to marry younger. There are instances in which a
person may be able to gain capacity earlier than the prescribed
time through a process of emancipation.
Conversely, many states allow the inexperience of childhood to be
an excusing condition to criminal liability and set the
age of criminal responsibility to match the local experience of
emerging behavioral problems (see doli
incapax). For sexual crimes, the age of
consent determines the potential liability of adult accused.

As an example of liability in contract, the
law in most of Canada provides that an infant is not bound by the
contracts he or she enters into except for the purchase of
necessaries and for beneficial contracts of service. Infants must
pay fair price only for necessary goods and services. However, the
British
ColumbiaInfants
Act (RSBC 1996 c.223) declares all contracts, including
necessities and beneficial contracts of service, are unenforceable
against an infant. Only student loans and other contracts made
specifically enforceable by statute will be binding on infants in
that province.

In contracts between an adult and an infant,
adults are bound but infants may escape contracts at their option
(i.e. the contract is voidable). Infants may ratify a contract on
reaching age of majority. In the case of executed contracts, when
the infant has obtained some benefit under the contract, he/she
cannot avoid obligations unless what was obtained was of no value.
Upon repudiation of a contract, either party can apply to the
court. The court may order restitution, damages, or discharge the
contract. All contracts involving the transfer of real estate are
considered valid until ruled otherwise.

A minor (typically under 18) can disaffirm a
contract made, no matter the case. However, the entire contract
must be disaffirmed. The minor cannot keep any of the goods traded
for.

Disaffirmance - it must be timely. For
example, a contract that goes beyond two years of reaching the age
of majority would be considered ratified. Minors are still allowed
to disaffirm, even if their age is misrepresented. They will not
face tort violations. Some states don’t allow disaffirmance if the
consideration cannot be returned.

Obligations - most states hold that a minor
only must return the goods (consideration) if the goods are still
in the minor’s possession. Many states are requiring that the minor
restore the adult (other party) to the state they were in before
the contract was made. Minors are beginning to be held responsible
for damages, wear, tear, etc. of the good in question upon return.
A suit for tort is considered by some states to be an enforcement
of the contract and is not allowed.

Liability - for necessities, (1) the item
contracted for must be necessary for minor’s existence, (2) the
value must be up to that of the current standard of living or
financial/social status (not excessive in value), (3) the minor
must not be under the care of a parent/guardian who is required to
supply the item. A minor could be held liable for a contract for
the purchase of luxury items (those that are not in the
financial/social/standard of living range).

Ratification - accepting and giving legal
force to an obligation. Express ratification (for a minor) is
expressly stating, orally or in writing that he/she intends to be
bound by the contract. Implied ratification is when the conduct of
the minor is inconsistent with that of disaffirmance or when minor
fails to disaffirm an executed contract within a reasonable
period.

Generally, the courts base their
determination on whether the minor, after reaching the age of
majority, has had ample opportunity to consider the nature of the
contractual obligations he or she entered into as a minor and the
extent to which the adult party to the contract has
performed.

Individuals may have an inherent physical
condition which prevents them from achieving the normal levels of
performance expected from persons of comparable age, or their
ability to match current levels of performance may be caused by
contracting an illness. Whatever the cause, if the resulting
condition is such that individuals cannot care for themselves, or
may act in ways that are against their interests, those persons are
vulnerable through dependency and deserve the protection of the
state against the risks of abuse or exploitation. Hence, any
agreements that were made are voidable, and a court may declare
that person a ward of the state and grant power of
attorney to an appointed legal
guardian (in England and Wales, this is a specific function of
the Court
of Protection).

This sort of problem sometimes arises when
people suffer some form of medical problem such as unconsciousness,
coma, extensive paralysis, or delirious
states, from accidents or illnesses such as strokes, or often when older
people become afflicted with some form of medical/mental disability such as Huntington's
disease, Alzheimer's
disease, Lewy body
disease, or similar dementia. Such persons are often unable to
consent to medical treatment and otherwise handle their financial
and other personal matters. If the afflicted person has prepared
documents beforehand about what to do in such cases, often in a
revocable living trust or
related documents, then the named legal guardian may be able to
take over their financial and other affairs. If the afflicted
person owns his/her property jointly with a spouse or other able
person, the able person may be able to take over many of the
routine financial affairs. Otherwise, it is often necessary to
petition a court, such as a probate
court, that the afflicted person lacks legal capacity and allow
a legal guardian to take over their financial and personal affairs.
Procedures and court review have been established, dependent on the
area of jurisdiction, to prevent exploitation of the incapacitated
person by the guardian. The guardian periodically provides a
financial accounting for court review.

In the Criminal
Law, the traditional common law M'Naghten
Rulesexcused all
persons from liability if they did not understand what they were
doing or, if they did, that they did not know it was wrong. The
consequences of this excuse were that those accused were detained
indefinitely or until the medical authorities certified that it was
safe to release them back into the community. This consequence was
felt to be too draconian and so statutes have introduced new
defenses that will limit or reduce the liability of those accused
of committing offenses if they were suffering from a mental illness
at the relevant time (see the insanity
and mental
disorder defenses).

Drunkenness/drug abuse

Although individuals may have consumed a
sufficient quantity of intoxicant or drug to reduce or eliminate
their ability to understand exactly what they are doing, such
conditions are self-induced and so the law does not generally allow
any defense or excuse to be raised to any actions taken while
incapacitated. The most generous states do permit individuals to
repudiate agreements as soon as sober, but the conditions to
exercising this right are strict.

If individuals find themselves in a
situation where they can no longer pay their debts, they lose their
status as creditworthy and become bankrupt. States differ on the
means whereby their outstanding liabilities can be treated as
discharged and on the precise extent of the limits that are placed
on their capacities during this time but, after discharge, they are
returned to full capacity. In the United
States, some states have
spendthrift laws under which an irresponsible spender may be deemed
to lack capacity to enter into contracts (in Europe, these are
termed prodigality laws) and both sets of laws may be denied
extraterritorial effect under public policy as imposing a
potentially penal status on the individuals affected.

Enemy aliens and/or terrorists

During times of war or civil strife, a state
will limit the ability of its citizens to offer help or assistance
in any form to those who are acting againsts the interests of the
state. Hence, all commercial and other contracts with the "enemy",
including terrorists, would be considered void or suspended until a
cessation of hostilities is agreed.

Business entities

Corporations

The extent of an artificial person's
capacity depends on the law of the place of incorporation and the
enabling provisions included in the constitutive
documents of incorporation. The general rule is that anything
not included in the corporation's capacity, whether expressly or by
implication, is ultra vires,
i.e. "beyond the power" of the corporation, and so may be
unenforceable by the corporation, but the rights and interests of
innocent third parties dealing with the corporations are usually
protected.

General and limited partnerships

There is a clear division between the
approach of states to the definition of partnerships. One group of
states treats general
and limited
partnerships as aggregate. In terms of capacity, this means that
they are no more than the sum of the natural persons who conduct
the business. The other group of states allows partnerships to have
a separate legal personality which changes the capacity of the
"firm" and those who conduct its business and makes such
partnerships more like corporations.

Unions

In some states, trade unions
have limited capacity unless any contract made relates to union
activities.

Insolvency

When a business entity becomes insolvent, an
administrator,
receiver, or other similar legal functionary may be appointed to
determine whether the entity shall continue to trade or be sold so
that the creditors may receive all or a proportion of the money
owing to them. During this time, the capacity of the entity is
limited so that its liabilities are not increased unreasonably and
to the detriment of the existing creditors.